Japan's consumption remains sluggish despite sales tax hike

But is retail sales getting the limelight?

According to DBS, two months have passed since the sales tax hike and consumption has remained weak. Many would focus on the retail sales numbers, which reported 4.6% MoM sa in May, a notable rebound from -13.6% in April.

Nonetheless, an index measuring households’ overall living expenditures (including both goods and services) contracted further by -3.1% in May on top of the -13.3% drop in April.

Here's more from DBS:

Spending on the services items including housing, transport & communication and culture & recreation continued to shrink significantly.

After all, the effects of sales tax hike on consumer prices remained in place in May as the prices of some services items were adjusted with a time lag. CPI inflation rose further to 3.7% YoY in May, 0.3ppt higher than in April.

The supply-side data also validate the conclusion that the economy has remained in a weak state. Industrial production increased merely 0.5% MoM sa in May, a modest payback from the -2.8% decline in April.

Output in the services and construction sectors, which are driven by domestic consumption demand to a relatively large extent, may even underperform.

Recovery should have just begun in June. With the impact of sales tax hike waning, the uptrend in inflation numbers paused in Tokyo in June (3.0%, vs. 3.1% in May).

Consumer confidence has showed a mild rebound. Flash PMI has also returned to the expansionary territory in June. Much of the improvement will be reflected in 2H data.

Still, how fast the pace of 2H recovery will be and whether it can match the BOJ’s optimistic forecasts are questionable.